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1
...
59(1))

Plc (s
...
Shareholders?

1 (s
...
7(1) & 8(1)

Min
...
154(1)

2 (s
...
270(1))

Yes (s
...
15(4))

Certificate of Incorporation
(s
...
761(1) & (2))

•

Min
...
8(1)(b))

Min
...
763(1)(a)(b))

Principle of Maintenance of Share Capital;

Offer of Shares to
the Public?

Prohibited (s
...
Amount
Payable for Share
Capital

No restriction
(s
...
593(1))
25% of nominal value must
be paid on allotment (+
whole of any premium)
(s
...
/Disclosure:

None

Expenses:

None

Management:

Partnership Agreement (default provisions apply)

Shares are issued by a company to raise finance
Each share must have a fixed nominal/par value (s
...
g
...
g
...
790D: Duty on companies to identify their PSC’s
S
...

2
...
/Disclosure:

Registered Office, Members Details, Accounts, PSC’s

Expenses:

Audited Annual Accounts, Confirmation Statement

Management:

Partnership Agreement (LLPA default provisions)

LTD (LIMITED COMPANY)

Shareholders exercise ultimate control over the company; and
Shareholders hope to receive a financial return on their investment
Determining the company’s constitution (Articles of Association)
Voting on Shareholder Resolutions

Articles of Association (AA):
•
•

•
•

Determine the internal management of the company and set out rules that
both directors and shareholder must follow
The AA form a contract between the shareholders and the company
o
The directors are not a party to this contract, but a director owes
a statutory duty to act in accordance with the AA (s
...
21(1)
An incorporated company will by default have the MA as it’s AA (s
...
20) but it is also free to choose its AA (mustn’t conflict with CA)
(Memorandum’s of Association also used to exist (with object’s clauses)
but these have been outdated by the CA)

Governing Statute:

Companies Act 2006

Liability:
Legal Status:

Limited (up to amount unpaid on shares (s
...
7(1))

Starting-up:

Incorporation Document (s
...
/Disclosure:

Registered Office (s
...
441), Share Capital, Resolutions (s
...
171-177)
Directors can exceed their powers/breach their duties to the company and
therefore become liable for the loss caused (this can be ratified)
Directors are paid for their services as acting as an agent for the company
(if also an employee therefore an executive director they may get a salary)
It is not unusual for directors to also be shareholders in the company, but
within legal terms they are two separate roles

2
...
87(1))
b) Change the accounting reference date (s
...
485(3))
BR to direct company secretary to deal with PMM’s

6) Voting?

Same as before

7) Closing?

BM1 closed (or adjourned for short notice)

1) Who Calls?

Any one of the directors (MA 9(1))

2) Notice?

Reasonable per usual for company (Browne v La Trinidad)
To all the directors in writing or otherwise ( MA 9(3))
With date, time, location and means of comm
...
318)

4) Disclosure?

Directors must declare any interest (s
...
177(6))

5) Agenda?

BR to effect requests;
a) Appoint directors (MA 17(1)(b))
b) Accept director resignations (MA 18(f))
c)
Approve transfer of subscriber (s
...
(s
...
123(2))
c)
Update PSC register (s
...
776)
e) (If not Short Notice) Deal with post-meeting matters
BR to approve form of notice of GM including;
a) Specify time, date, place and nature (s
...
325(1))
c)
Include the full text of any SR (s
...
77(1))
BR to call a GM (s
...
310(1))
b) Auditors (s
...
307(1) & s
...
1147)
Short notice can apply (s
...
307(5)) who;
b) Together hold not less than the requisite percentage in
nominal value of voting right shares
c)
Requisite %: Private company ≥90% (s
...
318(2))
Unless there is only one member (s
...
282(3))
•
SR: at least 75% of the votes cast (s
...
321(2)(b))
•
Members (10% of paid up share capital (s
...
282(3))
•
An SR is passed by at least 75% of the votes cast by
members present and voting (s
...
248(1) and s
...
162) & directors’ addresses (s
...
275)
Register of members (s
...
771(1))

Companies
House

Copy of any SR within 15 days s
...
26(1)
File any forms & fee at CH within statutory timeframe
a) NM01 (change of name) (s
...
address) (s
...
date) (s
...
167(1)) within 14 days
e) TM01 (termination of director) (s
...
276(1)) within 14 days
g) TM02 (termination of secretary) (s
...
legal entity with SC) (s
...
790VA)

Keep
Records

Minutes of BM’s for 10 years s
...
355(1)(b)

Other
Actions

Enter the…
Execute the…
Place the… etc
...
288(3)(a))
BR to Approve Form of Notice for WR (form of resolution s
...
291(4)(b))
PMM:
Company secretary must send or submit the WR to every member (s
...
502(1))
General Meeting:
Circulation:

Must be circulated to all eligible members (s
...
289(1))

Contents:

Statement explaining how to signify agreement (s
...
291(4)(b))
(Default: 28 days including date of circulation) (s
...
284(1)(a))
Resolution passed when the requisite majority of votes from
all eligible members have been received:
OR passed on simple majority (s
...
283(2))

3
...
g
...
558); and
Transfer of existing shares (s
...
21(1)
No Cap: Move to Step 2

Step 2

Do the Directors Require Authority to Allot shares? s
...
549(2) and s
...
551(1)
No:
Move to Step 3

Step 3

Do you need to dis-apply pre-emption rights? s
...
560/561
Yes:
Dis-apply pre-emption by SR s
...
21(1)
No:
Move to Step 5
Directors allot shares via BR and PMM need to be dealt with

STEP 1: CAP ON NUMBER OF SHARES
Determine which Companies Act the company has been incorporated under:
Companies Act 1985:
•
•
•

Check Memorandum of Association for a cap
Under s
...
121)

Companies Act 2006:
•
•
•
•

Check the AA’s for any restrictions on cap of number of shares
Check for any passed resolutions remove/increase cap
Check to see if any more shares have been allotted
If there is a cap, a SR is needed to amend articles to remove it (s
...
21(1) to amend articles to include type of shares allotted

STEP 5: ALLOTMENT & PMM
Once the necessary S/H resolutions have been obtained, the directors must pass
a BR at a BM to allot the shares
Under each of the 5 steps PMM must be considered, namely:
•
•
•
•
•
•
•
•
•

Copy of Amended Articles sent to CH (s
...
248(1) and s
...
113) within 2 months (s
...
771(1))
Return of allotment (SH01) within 1 month (s
...
555(3)(b))
Send new share certificates to new members (s
...
g
...
630)

Doctrine of Maintenance of Share Capital: Remember! A company is not usually
permitted to return capital to a shareholder post investment – all payments are
to be made from profits

SHARE TRANSFER

S
...
544(1)); the two common restrictions are:

•

1)

•

S
...
551(8): OR may grant authority (even it amends AA)
S
...

Article 26(5) MA: a director may refuse to register the transfer
b
...
771: a company must give reasons as to why
Pre-emption clauses
a
...
755: Restriction on private companies offering shares to the public

S
...
85 FSMA: 2 stage test as to whether shares are being offered to the public

1)
2)
3)

S
...
565: The shares must be wholly/partly for non-cash consideration
S
...
550 (one class)

s
...
551 (authorised)

s
...
571 – if specific transaction authority was given

1)
2)

Being offered to the UK public (s
...
85(2))

Exemptions include:
•
•

S
...
86(7))
Sch
...
DEBT FINANCE

•

The borrowing of money from a bank or financial institution etc
...
859P a company must keep available for inspection a copy of every
charge in their registered office, or CA permitted location
Inspection free of charge for members/creditors but a prescribed fee may
be charged for anyone else (s
...
g
...
859A (4));
o
A s
...
859A (3)); and
o
The relevant fee (£13 paper; £10 electronic)

Effect of failure to register under s
...

o
The debt becomes immediately payable
As security is a means of protection against insolvency, if unregistered the
security is worthless

•

•

•

•

Covenants (promises by
borrow to lender to ‘do’
and ‘not do’)
Security (fixed charges
give an element of
control – contractually
agreed)
Banks unwilling to lend
if highly geared
Existing loan
agreements need to be
checked in case further
borrowing is prohibited
Interest is a deductible
expense for tax
purposes

COMPANY PERSPECTIVE
Debt Finance Advantages:
•
•

No shareholder approval needed (subject to AA)
Interest paid on loan is tax deductible

Debt Finance Disadvantages:
•
•
•
•
•
•

Company must repay loan at end of term
Interest to be paid even when company is turning a profit
Increases company’s gearing (dissuades potential future investors)
Negatively effects company’s ability to raise finance (harder to borrow)
Restrictions placed on how company runs its business
Is security granted (often is), negatively effects asset management

Equity Finance Advantages:
•
•
•
•
•
•
•

New Shares strengthens balance sheet (lowers gearing)
Contributes to company’s long-term stability and growth
Lower geared balance sheet: company more attractive for debt finance
Company does not need to repay capital (unless buy-back later agreed)
Company only pays dividends if turning a profit
New investor can contribute his expertise and business
New investor will be invested and concerned about long-term profitability

Equity Finance Disadvantages:
•
•
•

Existing shareholder may resist dilution of voting/dividend rights
Dividends paid are not a deductible tax expense
Increase in number of shareholders increase GM disagreement and
disputes

5
...
190)

COMPLIANCE WITH STATUTORY DUTIES
S
...
177

Disclosure of interest in ‘proposed’ transactions or arrangements
Direct or indirect
May not have to declare if s
...
185
S
...
188)

Acquisition of a non-cah asset?
(s
...
252)
Is it a non-cash asset?
(s
...
188(1): D’s service contract is for a guaranteed term that is, or could be,
longer than 2 years
•

Is it 'substantial'?
(s
...
190)
Conflict of Interest?
(s
...
188(3)(a)(i): Continuing Period – if it can be continued otherwise than at
the instance of the company (‘rolling contract’)
o
Check Provision to see who can terminate: will fall within
provision if the Director is unconditionally allowed to extend
S
...
188(3)(b): Terminal by notice by company – look at the period of notice
that must be given for termination

REQUIREMENTS:

If contract falls within these provisions, then shareholder approval by OR will be
required (because removal of director important shareholder control)

•

Additional requirements:

•
•

•

S
...
253(2));
o
Associated company (D & connected own <20% of share capital);
o
Trustee of a trust a director/connected has interest in; or
o
Partner of the director
S
...
191: ‘Substantial’ non-cash asset
o
<£5000
Not substantial
o
>£100,000
Substantial
o
£5000-£100k
Substantial (if over 10% of co
...
190(2): if the director is of the holding company, or the
connected person is via the holding company – the arrangement
must also be approved by holding company
o
S
...
190(1) shareholder approval by OR is
required for the substantial property transaction

DEFENCE/EXEMPTIONS
s
...
195(6): if transaction between company and connected person, and D took all
reasonable steps to ensures Co
...
195(7): Defence to any person who can show he had no knowledge of the
circumstances constituting the contravention
s
...
195(2): If approval is not obtained – transaction is voidable unless;
•
•
•

Restitution is no longer possible
Company have been indemnified by another for damage/loss
Bona fide rights have been acquired by 3rd party

s
...
188(5): Display requirements – a memorandum setting out proposed
contract must be made available for inspection at registered office for not
less than 15 days (therefore short notice not particularly useful)
S
...
229(1))

SANCTIONS
s
...
177(6)(c): is an exemption from the requirement to declare an interest in
relation to consideration of a D’s service contract
However usual rules for voting and quorum still apply (MA 14 – cannot vote or
count towards quorum – can disregard by OR)

•

6
...
197

Loan

S
...
200

Loan/Quasi-Loan to
Connected Persons

S
...
213: The sanction for all transactions (and all companies) is civil; the transaction
is voidable unless;
•
•
•

Restitution is no longer possible
Company have been indemnified by another for damage/loss
Bona fide rights have been acquired by 3rd party

s
...
172

Duty to promote the success of the company

s
...
177

Disclosure of interest in ‘proposed’ transactions or arrangements

Companies must obtain shareholder approval to make loans to their;
a)
b)

s
...
198:

Direct or indirect

Directors
Holding Company Directors

PLC’s and Associated Companies must obtain shareholder approval
to make quasi-loans to:
a) Directors
b) Holding Company Directors

s
...
201:

PLC’s and Associated Companies must obtain shareholder approval
to make credit transactions to:
a) Directors
b) Holding Company Directors
c)
Connected persons (to either a and b)

May not have to declare if s
...
185

INDEMNITIES
s
...
197(5)(b): Wholly Owned Subsidiary:

A director can give a general interest notice (considered always to
have an interest in any transaction with a specified party

•

Approval is not required for wholly owned subsidiaries of another company

This is a permission to indemnify – but is unenforceable for directors as
AA’s are a contract between members and the company
Directors will therefore want stand-alone indemnity provisions
o
Executive Directors: Service Contract
o
Non-Exec Directors: Deed of Indemnity
Note that MA 52(2) permits authority to indemnify but only up to the level
not prohibited or rendered void by CA provisions

s
...
234: QTPIP’s:

•

•

If D is provided with money to pay for company expenses as part of his
duties), then shareholder approval is not required
o
Expenditure must be <£50,000
o
If value unobtainable its presumed over threshold

s
...
207: Minor Business Transactions:
•

Do not require Shareholder approval:
o
Loans or quasi-loans to D (or CP) of <£10,000
o
Credit Transactions of <£15,000

s
...
200, 201, 203 and is entered with a CP, a
director is not liable if he took all reasonable steps to ensure the company
complied with those provisions

s
...
214: Previously Affirmed:

•
•

Permits indemnification of liabilities incurred by D in relation to a 3 rd party,
but there are numerous important restrictions; indemnity will not cover:
o
Fine’s for criminal proceedings
o
Cost of criminal proceedings
o
Cost of civil proceedings
o
Applications to court for relief
Note however, that insurance can also be purchased by the company to
cover these (but there are public constraints) (s
...
236)

7
...
168)

s
...
168(2): To remove a director under section, special notice is required

Check to see if the director is an executive director or not (is he an employee
with a salary also, as well as a director; usually an employment contract)

•
•
•

s
...
360(1): Clear day rule applies for s
...
168 removal notice will be accompanied by a s
...
312(2): Same time & manner as per usual for a notice
o
s
...
307(1): 14 clear days’ notice of removal resolution
Board do not place removal resolution on the agenda
•
Directors are not bound to place the resolution on agenda (Pedley)
•
Shareholders therefore need to call a GM themselves

•

s
...
303(1): Request for the GM must state the nature of the business which the
shareholders wish to be dealt with at the GM (removal resolution under s
...
304: If the conditions of s
...
303 request
The meeting must be held not more than 28 days after the date of notice
convening the meeting

s
...
303 request) can call a meeting
themselves pursuant to this section:
•
•

The meeting must be held within 3 months of the date
S
...
168 notice for removal, and s
...
303(1) to call
GM and
propose OR to
remove
director under
s
...
304(1)(a)

Day 22
Directors
serve notice
of the GM and
OR on
shareholders

Board
convenes GM
within 21 days
for a date not
more than 28
days after GM
notice
s
...
303(1) to call
GM and
propose OR to
remove
director under
s
...
304(1)(a

Shareholders
serve notice
of GM and OR
on other
shareholders
(s
...
307(1) &
s
...
169(1): Once the company receives a removal notice, it must send a copy to the
director concerned immediately
s
...
169(2): The director has a right to be heard at the meeting irrespective of
whether he is a shareholder
Voting on Removal:
•
•

s
...
288(2)(a) does not allow WR to remove a director)
Bushell v Faith: clause in AA, gives D, who is also a shareholder weighted
voted rights, for a s
...
217; approval is not
needed however if:
o
s
...
222(1)(a): Where payment is made in contravention of s
...
222(1)(b): In addition, the directors who authorise the payment are held
jointly and severally liable to indemnify the company that made the
payment from any resulting loss

RATIFICATION OF DIRECTORS CONDUCT
s
...
g
...
Early dismissal can therefore give rise to:
o
Payment in lieu of notice; or
o
Claim for wrongful dismissal
Under employment law, the company may also be liable for unfair
dismissal (due to unfair procedure in passing the s
...
252)
cannot count towards the vote
o
S
...
239(4): under the OR procedure, the necessary majority
must be achieved disregarding any votes in favour made by
the director/connected persons (but they may still attend
and count in the quorum)

8
...
994)

MINORITY SHAREHOLDERS

s
...
33

s
...
994

Just & Equitable
Winding up
s
...
g
...
33)
s
...
33

DERIVATIVE ACTION (S
...
260(1): A derivative action is initiated by a member in respect of a
a)
b)

cause of action vested in the company; and
seeking relief on behalf of the company (not a personal action)

s
...
g
...
261-264, the member must seek court permission; this occurs in a 2stage process:
1)

2)

Stage 1: Application for Permission to Continue (s
...

Member issues claim form, files application notice seeking permission
b
...
261(4))
a
...
It will consider the mandatory refusal grounds in s
...
263(3) in determining
c
...
263(4) – important safeguard against
actions that are against the general body of shareholders)

JUST WINDING UP (S
...
122(g) (IA): allows a company to be wound up if it is just and equitable to do so;
it is often accompanied by a s
...
994 are expensive, time consuming and complicated to bring:
•

Since the court has such a large digression, there is a great degree of
uncertainty therefore generally a negotiated settlement is preferred

s
...
996(2) sets out types of order that can be made:
•
•
•

Regulating future conduct of the company’s affairs
Prohibiting of requiring certain acts or omissions
Purchase of the petitioner’s shares (rare – share price often heavily argued)

SHAREHOLDERS AGREEME NT
A shareholder’s agreement (SA) can also be used to protect the minority
shareholder’s rights within the company
•
•
•

SA provides a right of action which enables one member to enforce the
provisions directly against another
Because of the difficulty and uncertainty surrounding s
...
RETURNING VALUE T O SHAREHOLDERS

REDEMPTION FROM CAPITAL

Doctrine of Maintenance of Share Capital:

Pre-Meeting:

•

•
•
•
•

•
•

Capital investments made by shareholders is considered working capital
and cannot be returned
Trevor v Whitworth: Share capital of a company seen as permanent fund
available to creditor (the ‘creditors cushion’)
s
...
830(1): a company must not make a distribution of assets to shareholders
except out of realised profits available for distribution
•

Company must declare dividends in accordance with MA 30
o
BM: directors recommend dividend & amount
o
GM: Vote on dividend by OR
o
Directors can also make interim dividend

Difficult in Private Ltd companies due to doctrine of maintenance of share
capital and prohibition on public offering

However, it is possible for a company to buy-back its own shares through 2 ways:

2)

•
•
•

Redemption of (redeemable) shares
o
Out of profits/fresh issue
o
Out of capital (private only)
Purchase of shares
o
Out of profits/fresh issue
o
Out of capital (private only)

General Meeting:
•

•
•
•
•
•
•
•
•

•
•
•
Purchase

•
Out of Profits/

Capital

Fresh Issue
s
...
687

Fresh Issue
s
...
710
Check Articles

Accounts
SR (payment from
capital)

Check Articles
Contract
OR (approve
contract)
Verify Profits

Contract
Directors Statement
Auditors Report
Accounts
OR (to approve
contract)
SR (payment from
capital

REDEMPTION FROM PROFITS/FRESH ISSUE
Pre-Meeting:
•
•

Check shares in question are redeemable shares
S
...
684(4): Company must have redeemable shares in issue
o
S
...
685: terms of redemption: D’s can determine rights, unless limited by the
AA or an OR
s
...
689(2): Statement of Capital
s
...
688: Cancel/Reissue Share Certificates (as necessary)

s
...
707(1): Returns sent to CH within 28 days of purchase (SH03)
s
...
112-113: Update Register of Members
s
...
702(3): Keep copy of contract at reg
...
690(1): AA must not prohibit own share purchase
s
...
692(1): Private companies only

Board Meeting:
•
•
•
•

s
...
714(6): Auditors report (annexed)
Call GM (for required SR & OR)
s
...
696(2): Contract made available for 15 days before GM, and at GM, or
sent with any WR

General Meeting:

Capital

Verify Profits

s
...
719(1-2): Notify creditors of SR within 1 week (Gazette/Newspaper)
s
...
30(1): File SR at CH within 15 days
s
...
689(1): CH notified within one month of redemption
s
...
112-113: Update Register of Members
s
...
718(2): Copy of director’s statement and auditors report:
o
If WR: sent to every member before resolution is sent
o
If GM: available for inspection at the meeting
o
s
...
office
s
...
714(3): Directors written statement of solvency
s
...
684(2): No exclusion/restriction of redeemable shares in AA
s
...
687(1): Private companies only

•
•

s
...
720: both available for inspection at reg
...
694(2): OR to approve contract
s
...
719(1-2): Notify creditors of SR within 1 week (Gazette/Newspaper)

•
•
•
•
•
•
•

s
...
30(1): File SR at CH within 15 days
s
...
707(1): Returns sent to CH within 28 days of purchase (SH03)
s
...
112-113: Update Register of Members
s
...
641)
s
...
654: any reserve arising from a reduction of capital is not distributable without
the consent of the Secretary of State; there are various stages to this:

DE MINIMIS CAPITAL PURCHASES

1)

The De Minimis procedure (s
...
690(1): AA must not prohibit own share purchase
s
...
692(1): Private companies only
Confirm capital payments in financial year not exceeding the lower of
£15,000 or 5% of the value of the share capital

Board Meeting:
•
•

Call GM (for required OR)
s
...
642-644)
In any other case, by SR confirmed by the court (s
...
641(6))
Timetable for reduction needs to be agreed by the court including:
a
...
The date of the directions hearing
c
...
895-900: Schemes of arrangement

s
...
677-683: Financial Assistance

•
•
•

s
...
708(1-2): Notice of cancellation of shares & statement of capital sent to
CH within 28 days of purchase (SH06)
s
...
706: Cancel/Reissue Share Certificates (as necessary)
s
...
office for 10 years

TREASURY SHARES (S
...
724: Companies can if they wish purchase shares and hold them as treasury
shares (later to be resold) instead of having to cancel them
•
•

Shares purchased out of fresh issue, or from capital cannot be held as
treasury shares (including de minimis purchase)
The shares must be purchased out of profits, and can be held indefinitely,
and later sold, cancelled, or transferred

USE OF SHARE PREMIUM ACCOUNT
s
...
692: Govern the possibility of using the share premium account to
fund a purchase of shares
•

•

Both provisions set out 3 criteria that must be fulfilled to use the SPA for a
buyback of shares:
o
The shares were original issued at premium
o
The shares are being bought back at premium
o
A fresh issue of shares is being used to fund the purchase
If one of the elements is missing, then no use of the SPA (note: typically, in
an exam one of these elements will be missing)

PERMISSABLE CAPITAL PAYMENT
s
...
ACQUISITIONS
There are 3 ways in which you can purchase the business of a Ltd company:
•
•
•

Share Sale: acquire all the shares of a company
Asset Sale: acquire business as a going concern (in whole or part)
Sale of Assets: purchasing all the assets that you require

ASSET SALE
BUYER/PURCHASER
Buyers prefer Asset Sales
Advantages:
•
•
•

Can cherry pick the parts of the business it wishes to buy
Tax and other liabilities remain with the seller
Can also leave behind creditors and unwanted assets

ACQUISITION STRUCTURE
NON-DISCLOSURE AGREEMENT
NDA: a confidentiality agreement entered by both parties to keep secret, and
continue to (post completion or fall through), sensitive information

HEADS OF TERMS
These set out the parties basic understanding of the key commercial terms and
structure to the deal – an expression of the party’s intent within the deal
•
•
•

Not legally binding – moral obligation only
Heavily negotiated and lengthy in progress – encourages parties to often
proceed straight to a full-form contract
Often contain provisions for: confidentiality and exclusivity of sale; these
must be stated as legally binding if an NDA has not been formed

Disadvantages:

DUE DILIGENCE

•
•

Buyer subject to ‘caveat emptor’ or ‘buyer beware’: it is the buyer’s
responsibility to obtain as much information regarding the business and company
as possible prior to completion; due diligence questionnaire

•
•

Les continuity of business – more disruptive
SDLT is payable and the rates are higher than stamp duty; however, only
payable on properties that are acquired
Assignments, novation’s, consents of key contracts, leases may be required
and delay completion
More documents required for transfer

SELLER/VENDOR
Advantages:
•

Ideal where the seller wants to retain some business, and rid of part

Disadvantages:
•
•
•
•

Consideration paid to company – sale proceeds go to shareholders through
dividend and winding up
Double taxation – target will pay corporation tax and shareholders pay
income tax on dividends received
Seller left with liabilities of the company
Can only sell where there is a market for a certain asset

•
•
•
•

Due diligence reports are produced by lawyers highlighting areas of concern and
offering advice for further action; e
...
reduction in purchase price, and/or
contractual protection for buyer (warranties/indemnities)

ACQUISITIONS AGREEMENTS
Main Provisions within the agreement include:
1)
2)

SHARE SALE
BUYER/PURCHASER
Advantages:
•
•
•
•
•

Continuity (though may be a change of control clauses)
Less risk of adverse effect on goodwill
Ease of transfer (more straightforward)
No need for individual asset identification and transfer
Flexibility – can purchase some shares instead of whole

3)

4)

Disadvantages:
•
•
•
•
•

Due Diligence will be lengthier and more extensive process (expensive)
Will acquire company with all its assets and liabilities
Stamp duty payable on shares purchase
Tax liabilities of Target company are also obtained
Can lead to problems if only some shares purchased (minority shareholder)

Details of target’s property
Main contracts
Tax issues
(Often involve reviewing a data room of information)

5)

SELLER/VENDOR

Consideration
a
...

Warranties
a
...
Common areas: accounts, employee’s, IP, real estate, contracts,
trading agreements, disputes and taxation
c
...

Promises made by the seller – to reimburse the buyer for any loss it
suffers in connection with contingent liabilities
b
...
g
...

Limit the seller’s liability for breach of warranty claims – a time limit
and upper cost limit are usually included (de maximus) (usually at
most the consideration paid by the buyer) and a lower limit (de
minimus)
Arrangements for Completion
a
...
Deals with what needs to be dealt with prior to completion

Sellers prefer Share Sales

DISCLOSURE LETTER

Advantages:

Sellers liability for breach of warranty can be limited by the Disclosure Letter; a
letter written by the seller addressed to the buyer setting out any details of
matters which make the statements of fact given in the form of warranties
untrue; there are 2 types:

•
•
•

Clean break sale
Consideration goes directly to the seller
Tax – shareholders only get taxed once – CGT and may be able to take
advantage of entrepreneur’s relief

•

Disadvantages:
•

Seller must give warranties and indemnities for couple of years and can be
held liable under those (could be extensive)

•

General Disclosures:
o
Usually ‘front-end’ of the letter relating the searches of the public
registers that the buyer should prior to completion (Land Register,
Register of Companies etc
...
)
Transitional Key Agreement – if company was being provided with key
operational services by parent or sister company prior to completion
(allows continuation for agree amount of time)

LIABILITY
Where there is more than one seller, the buyer usually insists that they all
become Warrantors under the agreement; they will also usually insist on the
sellers being jointly and severally liable;
•
•
•

Joint and several: each seller assumes the obligation collectively and
individually (the buyer can sue any seller for whole or part of the loss)
Several: each seller is liable for an agreed proportion of the potential
damages (buyer brings proceedings against individuals)
Joint: similar to 1st position, but death of party releases his estate from
liability

COMPLETION AND POST -COMPLETION
Both parties and their legal representatives meets and sign all the documents
•

Usually some last-minute negotiation

Lawyers should deal with all the necessary post-completion steps such as:
•
•
•

Statutory filings
Updating statutory books
Payment of stamp taxes etc
...
678-679: there are numerous elements which must be satisfied for a given
transaction to fall within the prohibition; the elements are:
•
•
•
•
•
•

There is an acquisition of shares, and
A company to which the prohibition applies;
Gives financial assistance;
Directly or indirectly;
Before or at the same time as the acquisition;
For the acquisition or after the acquisition for assistance

WHICH TRANSACTIONS AND COMPANIES
•

Share sale only

Identify what the Target Company is:
•

•

Public:
o
s
...
679(1-3): the prohibition on giving FA applies to any public
subsidiary of the target company only

WHAT IS FINANCIAL AS SISTANCE
s
...
677(1)(a))
By way of guarantee, security, indemnity, release or waiver (s
...
677(1)(d))

2)

3)

The Purpose Exception
s
...
679(2) & (4): The giving of financial assistance will
not be prohibited if the primary purpose in giving is not for the
acquisition (very narrow application)
The ‘Unconditional’ Exception
s
...
681(2)(d): Share buy-backs
The ‘Conditional’ Exception
s
...
682(2)(a): Money Lending in ordinary course of business
s
...
680: breach of s
...
679 is an offence which can lead to penalties for the
company (a fine), and for the officers of the company (fine/imprisonment)
•

The transaction that amounted as a result of the Fa may also be void and
unenforceable

11
...
g
...

•

•

Directors will be in breach of their statutory duties to promote the success
of the company if they don’t act (s
...
Receiver can be appointed
No steps can be taken to enforce security
No legal proceedings can be brought against the company
A landlord cannot forfeit a lease of the company

Administrators can be appointed by court order, or out of court by directors or
holders of qualifying floating charges (QFC’s)

QUALIFYING FLOATING CHARGE
Most common form of charge (normally contained within a debenture) usually
containing a provision for (usually a bank) to appoint an administrator following
the occurrence of an event of default under the loan agreement
Sch
...
895-901); or
Company Voluntary Arrangement (CVA) (s
...
g
...
1 IA: Administrators have wide powers set out in schedule:
•
•
•

Carry on the business of the company
Raise money on security and execute documents and deeds
Do not have power to pay dividend to unsecured creditors without courts
permission

Administrators appointment terminates 12 months after their appointment (can
be extended up to one year) (can be further extended by the court)
Administrators like liquidators can obtain court orders to ‘set-aside’ voidable
transactions, with the aim of increasing the pool of assets available to the
creditors, and can now sue directors for wrongful & fraudulent trading (EEA 15)

COMPULSORY LIQUIDATION

ORDER OF PRIORITY IN INSOLVENCY

The following can apply to court for a compulsory winding up:
1)
2)
3)
4)
5)
6)
7)

A creditor (normally unsecured)
The company (acting through its members)
The directors (board resolution)
An administrator
An administrative receiver
The supervisor of a CVA
Secretary of State

1

2

s
...
122(1)(f) IA); or
The court being of the opinion it is just and equitable to wind up the
company (s
...
123 IA: Proof of inability to pay debts:
1)
2)
3)
4)

Failure to comply: with a creditor’s statutory demand (demand only
possible if debt exceeds £750, and isn’t disputed
Sued: by creditor, creditor obtains judgement, fails in attempt to execute
judgement
Cash flow test: proof to the court the company is unable to pay debts
Balance Sheet Test: proof to the company the value of the company’s
assets is less than its liabilities

VOLUNTARY LIQUIDATIO N
Two types of voluntary liquidation:
1)
2)

Members Voluntary Liquidation (MVL) (solvent liquidation)
Creditors Voluntary Liquidation (CVL) (insolvent liquidation)

3
4

5
6
7

Liquidators duties are;
•
•
•
•

Realise any assets for cash
Determine the identity of the creditors
Determine the amount owed to each creditor
Pay dividend in proportion basis relative to their claim

MEMBERS VOLUNTARY LIQUIDATION
s
...
178) (e
...
property on lease –
paying for it with no use)

8

• Liquidators Costs in realising fixed charge assets
• Deucted from sale proceeds of fixed charge

• Fixed Charge Creditors
• If there is a shortfall, creditor becomes unsecured for remainder

• Liquidator's Other Costs
• Costs of selling assets, expenses of liquidation

• Preferential Debts
• Employees - remuneration 4 months prior to max of £800

• Ring Fenced Fund (s
...
CORPORATE INSOLVENCY

MISFEASANCE (S
...
213 & S
...
213(1) & s
...
213(2) & (246ZA (2)) who is knowingly a party to the
carrying on of any business of the company with the intent to defraud creditors
or for any fraudulent purposes
Requirements for liability under s
...
246ZA (1):
•
•
•

Actual dishonesty must be proved
Very high standard of proof & difficult for L or A to establish
Therefore, claims under this section are rare

Who may bring a claim?
1)
2)
3)

A liquidator (note: not and administrator);
The Official Receiver; or
Any Creditor or Contributory

Against whom can the claim be made?

Defences:

1)
2)
3)

•

What can amount to misfeasance?

Dishonesty is assessed on a subjective basis, not objective; can try and
prove a genuine belief that ‘things might get better!’

Sanction:
•
•
•

Persons found labile under section can be required to contribute to assets
of the company as the court thinks proper (not penal, only restoration)
If person found guilty is also a director; most likely face disqualification
under s
...
994: Criminal sanctions can also be imposed to punish those involved with
the fraud, regardless of whether company is being wound-up
(imprisonment up to 10 years and/or fines)

WRONGFUL TRADING (S
...
214(1) IA & s
...
251 IA)
Requirements for liability under s
...
246ZB (2) IA:
•

•
•

For a director to be liable, the court must be satisfied that:
o
At some point prior to winding-up (‘point of no return’);
o
The director knew, or ought to have conclude that;
o
There was no reasonable prospect of avoiding insolvency
Remember: Companies go insolvent when its assets are insufficient to pay
their debts and other liabilities
Insolvency is therefore judged on the ‘balance-sheet’ test rather than the
‘cash-flow’ test

Defences:
•

s
...
246ZB (3) IA: The ‘Every-Step’ Defence:
o
A director may escape liability, if he can prove that after he
knew there was no reasonable prospect of avoiding insolvency,
he took every step with a view to minimising the potential loss
to the company’s creditors, such as:
▪
Voicing concerns at board meetings
▪
Seeking independent financial & legal advice
▪
Ensuring up-to-date financial info is available
▪
Suggesting reductions in overheads/liabilities
▪
Not incurring further credit/debt

s
...
246ZB (4) IA: The ‘Reasonably Diligent Person’ Test:
•

•

This test determines whether D is liable, two step test:
o
L or A has established that a director ought to have concluded
there was no reasonable prospect of avoiding insolvency; and
o
Whether a director took every step to minimise the loss to the
creditors
Under this test the court apply the higher standard of knowledge test upon
the director in question, choosing between;
o
The general knowledge, skill and experience that may be
expected of any person carrying out the same functions as
carried out by D in question (objective test); and
o
The actual knowledge, skill and expertise of the specific D in
question (subjective test)

Sanction:
•
•

Persons found labile under section can be required to contribute to assets
of the company as the court thinks proper (not penal, only restoration)
s
...
B1 IA)
Misapplication of money or assets in the company
Breach of statutory provision, for example;
o
Unlawful loans to directors
o
Undisclosed interest in transactions (s
...
190 CA)
o
Failing to act within powers (s
...
238 IA) or at a preference (s
...
e
...
174 IA)

s
...
4 & s
...
4)
& unfit conduct of directors of insolvent companies (s
...
238:
Transaction
at
Undervalue
s
...
245:
Avoidance
of floating
charge

Unconnected
Person
Connected
Person

Relevant
Time (prior
to onset of
insolvency)

Insolvency
required at
date? (or
because of
transaction)

2 years

Yes

No
Yes

Unconnected
Person

6 months

Connected
Person

2 years

Unconnected
Person

12 months

Yes

Connected
Person

2 years

No

No rel
...
423
Transaction defrauding
creditors

Presumption
available?
(if yes =
burden of
proof shifts)

No
Yes
Yes

No

Yes

s
...
435 IA)
s
...
238 IA, s
...
245 IA
s
...
245(5) IA: ‘Onset of insolvency’ (administration: date of filing the
application, liquidation: date of MVL/CVL GM resolution (s
...
238 IA)
Who can bring a claim?
•

s
...
238(4) IA: a gift; or a transaction for a consideration the value of which, in
money or money’s worth, is significantly less than the consideration
provided (a comparison between value and cost)

Sanction:
•
•

AVOIDANCE OF FLOATING CHARGES (S
...
238(2) IA):
▪
2 years preceding the onset of insolvency (s
...
240(2) IA)
▪
Insolvency presumed for connected persons: may be
disproved by said connected persons)
s
...
241 IA: provides a non-exhaustive list of the types of restoration order a
court may make under s
...
241(2) IA: Any such order should not prejudice a subsequent purchaser of
the undervalued goods, provided they acted in good faith
o
s
...
239(4) IA: A company gives preference to a person if:
1) That person is a creditor; and
2) The company does anything or allows/suffers anything to put
that creditor in a better position
The court may set aside the transaction as undervalue if;
o
It took place within the ‘relevant time’ (s
...
240(1)(b) IA) (unconnected persons)
▪
2 years preceding onset of insolvency (s
...
240(2) IA)
▪
No statutory presumption of insolvency
o
It is proved that the company was ‘influenced by a desire to
prefer the creditor’ (s
...
239(6) IA)

Defence:
•

s
...
239(5) IA:
o
Need not prove intention (objective) merely only desire
(subjective)

Claims under s
...
238 IA) will also fulfil the requirements of
s
...
423(3) IA: It must additionally be proven under s
...
238 IA are preferred

Who can bring a claim?
•

When and how can the Preference be avoided?
•

Charge is void if it is not registered at CH under s
...
239 IA

TRANSACTIONS DEFRAUDING CREDITORS (S
...
239(1) IA: Only a liquidator or administrator may make an application to
court challenging a preference

s
...
239 IA)
•

For a floating charge to be invalid:
o
It was created within the ‘relevant time’ (s
...
245(3)(b) IA) (unconnected persons)
▪
2 years preceding the onset of insolvency (s
...
245(4) IA)
▪
Insolvency presumed for connected persons and
associates

When is a floating charge vaiid?

Sanction:
•

s
...
239(3) IA: The court has discretion to make an order to restore the
company as if the preference had not been given
s
...
239 IA

s
...
423(2) IA: The court has discretion to make an order to restore the
company to the position it would have been in but for the transaction in
question
s

---